NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
Mr. Iyer invested Rs 50,000 in a security that grew to Rs 60,500 in exactly two years. What is the compounded annual growth rate (CAGR)?
The CAGR is 10%. The investment grew by a factor of 1.21 over two years, and the square root of 1.21 is 1.10. Hence the annual compounded rate is 10%. The figure 21% is only the total absolute return over the period.
- A10%Correct
- B10.5%
- C21%
- D9.5%
Explanation
CAGR = (60,500/50,000)^(1/2) - 1 = (1.21)^0.5 - 1 = 1.10 - 1 = 10%. Check: 50,000 x 1.1 x 1.1 = 60,500. The 21% figure is the absolute return over two years, not annualised.
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